Company Perspectives:

In a world where health care has made remarkable technologic advances, it is the human touch that makes the difference. Today, we are being asked to consider innovative ways to deliver health care. For that, we formed strategic partnerships to become a diversified, full-service company, the largest long-term care provider in the nation. We believe in providing quality care with compassion, kindness and respect for the individual needs of those who place their trust in us.

Company History:

Beverly Enterprises is the largest nursing home chain in the United States. Beverly operates more than 700 nursing homes and retirement centers across the United States, as well as seven retirement centers in Japan. Beverly also owns the nation's largest institutional pharmacy through its subsidiary, Pharmacy Corporation of America (PCA). PCA's 65 pharmacies provide services to patients in long-term care, home care, nursing homes, correctional institutions, assisted living facilities, and other managed health care facilities. Beverly operates eight acute long-term transitional hospitals and eight long-term care nursing facilities for patients who require extensive nursing for a month or more. Beverly also operates a small chain of hospices, to provide care for terminally ill patients.

Early History

Formed in 1964, the company was clearly the industry leader by the mid-1980s after an aggressive acquisition campaign. At the time of its incorporation, the company consisted of three convalescent hospitals in the Pasadena region of southern California. The founder, Roy E. Christensen, was a Utah accountant. In its first decade, Beverly expanded into such things as plastics, printing, real estate development, and mirror manufacturing. As a result, the company was heavily leveraged and in the red by 1973. In 1971 Robert Van Tuyle was recruited as a director from his 40-year career in the chemical industry, and he immediately began to streamline Beverly, divesting the company of its unrelated interests and focusing on long-term health care.

In the late 1960s and early 1970s, the nursing home industry was experiencing a glut. The onset of Medicare and Medicaid in the mid-1960s had sparked a rush of new entrepreneurs in what had previously been a largely unprofitable industry. The too-rapid expansion stalled at about the time Van Tuyle joined Beverly, but he believed that the nursing home industry still had growth potential. Growth became Beverly's trademark beginning in 1977 when it purchased Leisure Lodges from its parent company, Stephens Inc., of Little Rock, Arkansas. Leisure Lodges was a chain of nursing homes. The purchase doubled Beverly's size, making it number two in the industry. David R. Banks, who had been chairman of the Leisure Lodges chain, joined Beverly as president and CEO in 1979.

Small chains and solo organizations were ripe for acquisition in the early 1980s because they were having trouble turning a profit on Medicaid reimbursements. Beverly's size and centralization, on the other hand, permitted economies of scale. Between 1976 and 1983, Beverly's revenues increased 12 times, primarily through acquisitions. The company grew from 47 homes in 1971 to 1,136 homes in 1985, when it had a presence in 45 states and Canada. By 1983 Beverly was the nation's largest operator of nursing homes. It had more than twice as many beds as the Hillhaven Corporation, its nearest competitor, and represented seven percent of the industry.

Industry Changes and Challenges in the 1980s

A new "prospective payment plan," the result of federal legislation, promised to increase the flow of patients into convalescent centers by forcing hospitals to release them sooner. At the same time, the 1983 legislation changing Medicaid-Medicare reimbursement made the health care industry suddenly cost-conscious. These changes also meant that the industry was subjected to greater regulation by state and federal governments. Beverly posted record profits in 1985. The company was less concerned by its growth-fueled debts and Medicaid cost-capping than by the industrywide labor problem with potential for a union battle. Turnover was high in the low-wage, high-stress work force of nursing homes.

Problems began to surface by 1986, as allegations of neglect prompted investigations by various state health officials. Between 1985 and 1988, six Beverly facilities in Missouri were threatened with license revocation. In 1986, officials in Texas suspended Medicaid payments to 24 of Beverly's 134 nursing homes in that state, citing hazardous health deficiencies; the state revoked the license of one home. That same year, Beverly settled a legal battle with the state of California's department of health services by paying a record $724,000 in fines. The company was accused of care so negligent that it contributed to or caused the death of nine patients in that state. Beverly agreed to pay the fines without admitting to the specific charges and was put on probation for two years. In 1987 health care officials in Maine and Washington, D.C. denied Beverly permission to open any new homes in their domains because of its poor patient-care record. In Michigan, the health department claimed that Beverly owned almost half of the facilities facing denial of Medicaid payments because of substandard care in 1987. Regulators in Minnesota asserted that eight deaths in Beverly homes there were related to neglect.

The sensational details of some of the specific charges--including rape and gangrene and amputation caused by infected bedsores--damaged Beverly's reputation and caused a drop in occupancy rates. The company lost $30.5 million on $2.1 billion in revenues in 1987. The same year, Beverly's top management tried an unsuccessful leveraged buyout of the company.

While occupancy rates were dropping and reimbursement problems worsened, labor expenses increased by between $90 and $120 million in 1987 when Beverly had to raise its wages. Nurse salaries were still less than competitive, and there was a shortage of nurses at this time. In addition, the expanding economy was offering other options to unskilled workers. About 70 percent of the nursing home work force consisted of poorly paid, low-skilled nurses' aides. With its image and occupancy problems, Beverly was obliged to remedy its employee troubles. Violations of statutory requirements for staffing, training, and patient care were not unusual in an industry with labor costs as its biggest expense. Labor costs accounted for 60 percent of Beverly's expenses. To combat the charges of chronic neglect, Beverly started a quality improvement program in 1988 and established a $5.7 million training center in Atlanta for nurses and administrators.

Beverly's $1.1 billion debt was beginning to pinch by 1988. The company considered filing for reorganization under bankruptcy court protection in that year. Instead, it began selling off properties. Beverly was fined another $124,000 after a reinspection of its Oak Meadows Nursing Center in Los Gatos, California, where negligence had contributed to four patient deaths in 1985. Officials found evidence of medical record falsification, medication errors, and neglect. The facility's license was revoked and Beverly sold the home in February 1988.

About the same time that Beverly was taken off probation in California late in 1988, Minnesota moved to revoke the license of all 42 of the company's nursing homes in that state. The National Labor Relations Board brought a case against Beverly, charging it with more than 200 labor violations in 36 homes in 6 states and accusing the company of engaging in a pattern of unfair labor practices. Management claimed that staff turnover, at 78 percent, not company policy, had precluded the formation of unions. At that time, about 11 percent of its staff was organized.

Troubles in California homes did not end with the probation. Beverly was fined more than $130,000 for patient neglect in its northern California Novato Convalescent Hospital, and the probational status of another home was extended for two more years. In the first nine months of 1988, Beverly lost $12.3 million.

The occupancy rate at Beverly's more than 1,000 homes stabilized at 88 percent by 1989. Staff turnover had also been cut. At that time, the $40 billion nursing home industry, which served 1.5 million people in the United States, was in crisis. Although 63 percent of patient days were to be paid by Medicaid, money from Medicaid only accounted for 41 percent of payments. The squeeze between rising costs and inadequate government reimbursement meant many companies were losing money. The average daily payment by Medicaid for a nursing home patient had risen an average of 4 percent between 1985 and 1988, but labor costs had risen 11 percent. Two-thirds of Beverly's staff were aides whose wages were only 50 cents an hour more than workers at fast food restaurants. High turnover contributed to the quality-of-care problems that plagued the industry.

Late 1980s Reorganization

Beverly underwent extensive reorganization in 1989, including the elimination of three layers of management and a substantial reduction in the number of its properties. Although there was an increase in revenues in 1989 over 1988, Beverly announced a $120 million charge in the second quarter of 1989, a charge associated with the planned sales of 35 percent of its homes. Proceeds of the sale of 370 homes would help the company reduce its debt, as well as trim it of homes that did not fit into a new long-term strategy. Some of these planned sales, however, were not completed by the end of 1989.

Beverly sold 11.5 million shares of common stock in March 1990, netting about $45.7 million, to be used in refinancing debt. With about $470 million in debt to be restructured, the company made a public offering of $40 million of convertible debentures in mid-1990 and had plans to complete its debt refinancing by year's end.

Robert Van Tuyle stepped down as chairman of the board in May 1990, after 19 years of leadership. He was succeeded by David Banks. In summer 1990, the company moved its headquarters from Pasadena to Fort Smith, Arkansas. The move to new headquarters, in the back of a shopping center, was a cost-cutting measure, and it also put the company in closer proximity to its major shareholder, the Little Rock investment firm, Stephens Inc. Stephens owned 10 percent of Beverly's stock, and the firm had a keen interest in keeping Beverly financially sound. Stephens helped Beverly put through a sale of 41 of its Iowa nursing homes in 1990 to raise cash. The 41 homes were acquired by a nonprofit corporation called Mercy Health Initiatives (later known as Care Initiatives), financed by $86 million in tax-exempt revenue bonds. This deal became the subject of controversy when an Iowa Supreme Court judge found that Care Initiatives was a "shell" nonprofit controlled by a Texas banker, not truly a charitable institution. The banker had made a profit of at least $15 million. The story attracted more attention than it might have because the transaction had been handled by the Rose Law Firm, where First Lady Hillary Rodham Clinton worked, and two of the lawyers involved were close aides to President Clinton.

Beverly sold close to 200 of its homes by 1991, and the company's debt became more manageable. After having lost $160 million over the preceding three years, the company turned a profit in 1990 of $13 million. Beverly also worked to improve the quality of its care. The company instituted a continuing education program for its nurses, to expose them to the latest research in care for the elderly, and Beverly began to spend more on training its workers and on inspecting its facilities. Beverly needed to improve its image substantially to attract higher-income residents. In 1990, about 65 percent of Beverly's patients were paid for by Medicaid, which paid less than private insurers. Beverly aimed to bring down the proportion of Medicaid patients over the next few years to 50 percent. But the company still suffered allegations of patient abuse. And the company had trouble with its labor relations as well. In November 1990 a judge with the National Labor Relations Board cited Beverly in one case for illegally firing employees who were organizing a union, and more than a dozen similar complaints were being investigated.

Despite moves to contain costs and attract more profitable patients, Beverly did not perform as well in the 1990s as some of its competition. In response, the company began to move into higher-paying areas of patient care, such as rehabilitation therapy and subacute care. The company also made several acquisitions to bolster its pharmaceutical subsidiary, PCA. In 1994 Beverly paid about $112 million for Insta-Care Holdings Inc., the nation's fifth-largest institutional pharmacy business. In the same year, Beverly also acquired for PCA three drug distribution companies from Synetic, Inc. These acquisitions nearly doubled PCA's revenues, to more than $400 million.

Then in 1995 Beverly proposed to spin off PCA, selling 20 percent to the public and distributing the rest to shareholders. This move was seen by some analysts as an attempt to soothe investors, who felt they were not getting adequate returns from Beverly. The spin-off was announced in April, then abruptly canceled in June. Problems with pricing at PCA reportedly made the spin-off unadvisable, and management promised to pursue it in early 1996 instead. As that deadline approached, Beverly announced further cost-cutting measures and lower than expected earnings for the fourth quarter of 1995. The poor results were blamed on PCA's continuing trouble integrating its recent acquisitions. In January 1996 Robert Woltil, president of PCA, resigned. Chairman David Banks assured investors that Beverly was positioning itself well for the long term. But Beverly certainly faced a challenge in maintaining the delicate balance between keeping its costs down while providing quality care to its patients, and planning for growth while giving its stockholders adequate returns.